Q: I just read about the cap on debit card interchange, and I’m wondering how this will impact me as a five-store menswear chain. Will I see a significant drop in my fees? How will I be able to account for it?
A: The passage of this legislation was a huge victory for retailers, a $16 billion victory. First, a little background because we have been following this debit card legislation very closely.
This was a hotly contested battle between the retailers and the card-issuing banks. Debit cards generate fees of $16 billion for the banks annually. The Durbin Amendment, which was a piece of legislation added to the Dodd-Frank bill, sought to limit the interchange rates that banks could charge for debit from an average of 44 cents to 12 cents.
Interchange rates are the fees a bank charges to retailers when consumers use their credit or debit cards. The Durbin Amendment covered only debit card interchange where it was argued that banks enjoyed a windfall in fees, without the commensurate costs of issuing credit cards.
The banks made the case that a cap on fees would not give them a needed reserve to protect against debit card losses and provide the necessary risk management. It would therefore require them to limit the amount, or cap, what a consumer could put on a debit card, ultimately hurting the consumer.
In addition, the interchange fees funded the rewards program for debit cards. As a result of this legislation, many banks, such as Chase, are ending those rewards programs that had encouraged consumers to use these cards.
Last May, the Senate approved The Durbin Amendment by a 64-33 margin to cap the debit interchange fees, and the vote that took place last week, championed by Sen. Jon Tester (D-Montana), was a last attempt to delay the changes from going into effect to allow Fed to further analyze the potential impact. The banks failed to get the necessary 60 votes to make that happen, and the Federal Reserve Board will move forward to cap the charges banks can charge on debit interchange by July 21.
Now that the Interchange regulation on capping debit fees is official, what does it mean to you, the independent specialty retailer?
The first thing to understand is that any reduction in debit interchange doesn’t necessarily mean most merchants will realize these savings. As I discussed in a previous article, the majority of merchants are priced on a tiered credit card pricing structure (with a “swiped” qualified rate, a mid-qualified rate and a non-qualified rate). In a tiered-rate structure, individual interchange levels (such as debit) are not broken out but are bundled together, and as a result, retailers on this plan will not receive the penny for penny cost reduction the legislation provides.
So while the interchange fees for debit are being reduced by more than 70 percent, only a quarter to a half of the savings will most likely be passed on to merchants. The nation’s largest retailers, who had the lobbying heft in Washington to get this passed, and are all on interchange plans, will certainly get their share of the $16 billion. However, this will not be the case for the small and mid-size merchants that are still on tiered pricing plans.
In addition, there will be little motivation by processors, who enjoy high tiered-rate margins, to change clients to interchange pass-through and pass along the cost reductions. Since the fees on debit cards are coming down precipitously, the profit margin on tiered-rate programs will spike for processors using this structure. On a pure interchange pass-through plan, the savings all goes to the merchant, penny for penny. That means you need to make sure you get this structure in place for your business to benefit.
Another cautionary note is to be aware of faux interchange rate plans. There are programs disguised as interchange pass-through plans that are actually hybrids of both interchange and tiered-rate plans with sizable markups.
In an example of this type of interchange pricing, you would find interchange plus 20 basis points for a “qualified” transaction, but 50 basis points over interchange for a mid-qualified transaction and 100 basis points over interchange for anything they consider a non-qualified transaction. This goes against everything a true interchange program was designed to do, eliminate tiers and the large markups on credit card transactions.
So what actions should you take now in light of this legislation? Take a look at your most recent merchant statement and if you are not on a direct interchange pass-through pricing plan, make that a priority before the July 21st date when the Fed changes the fee structure. That will allow you to immediately benefit from the price reductions in debit, along with all the other financial benefits an interchange plan delivers over tiered pricing. (Again, see my previous article for benefits of interchange over tiered rate plans.
If you would like to discuss the benefits on interchange pass-through in more detail, e-mail me at michael@retailmerchantservices.com.
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